It’s no secret that FICO scores and other credit risk scores consider credit inquiries when calculating your credit scores. A credit inquiry, if you are not familiar with it, is a record of who pulled your credit report and on what date.

If you want to bone up on inquiries you can do so here. I wrote that article for Mint a couple of years ago and the content is still accurate today.

When it comes to credit applications, many consumers are worried that by applying for credit they might lower their scores. That is certainly a possibility. Credit inquiries can lower your FICO scores. Notice I used the word “can” and not the word “will.”

The True Impact of an Inquiry

Before you choose to not apply for whatever it is you’re applying for, consider the fact that inquiries have a marginal, at best, impact on your credit scores.

Further, just because an inquiry causes your score to go down it may not cause it to go down enough to change any lender’s mind. Going from FICO 790 to FICO 786 because of new inquiries is likely going to be an irrelevant change when it comes to your credit application.

You’ll also want to keep in mind that the majority of credit applications result in one new inquiry on one of your three credit reports.

Applying for a new credit card doesn’t mean all three of your credit reports are being accessed. Only one is going to be pulled so the new inquiry will only appear on that particular credit report. That means your FICO scores at the other two credit bureaus are not impacted at all.

The only exception to this rule is a mortgage application where the lender or broker will likely pull all three of your credit reports.

The Grand Scheme

Something else to keep in mind…credit inquiries really aren’t terribly important in the grand scheme of things. Inquiries account for up to 10% of the points in your FICO scores. When it comes to pieces of the FICO score pie, it’s the smallest piece. The age of your credit report is more important than your inquiries.

FICO just released some data quantifying the true impact of inquiries to their scores. 57% of consumers are getting the maximum number of points from the inquiry category, which means inquiries are not lowering their scores at all. Inquiries are one of the top four reasons your FICO scores aren’t higher only 11% of the time.

And finally, only 4% of consumers lose more than 20 points in their FICO score because of inquiries. According to Frederic Huynh, one of FICO’s credit score scientists, “The bottom line is that I would not characterize inquiries as being a very important score factor relative to other predictors.”

Bigger Fish to Fry

If you’re concerned about your FICO scores then there are certainly bigger fish to fry than inquires. Negative information and paying your bills on time makes up a 35% piece of the pie. The various debt related measurements account for 30%. How long you’ve had credit is worth 15%. And, the diversity of account types accounts for 10% of the score points.

Keep in mind that when you pull your own credit report through sites like www.annualcreditreport.com, the inquiry has no impact on your scores. And, if you subscribe to a credit monitoring service or choose to purchase your credit reports through any of the retail websites, those inquiries also do not impact your scores.

Read a Report

Once you’ve obtained a copy of your credit report, you’ll be able to see what your creditors are saying about you. There’s just one problem — credit reports can be a little confusing. Never fear! Elite Financial, LLC is here to help. In the following paragraphs you’ll find a step-by-step explanation of how to read and interpret each section of your credit report.

I.D. Section

Here you’ll find identifying information like your:

name

current address

social security number

date of birth

spouse’s name (if applicable)

Easy, right? But don’t just skim over this section. Read all the entries to make sure everything is correct. One bad piece of information and the credit history listed on your report could be wrong.

Credit History Section

This is the meat of the report. It contains a list of your open and paid credit accounts and indicates any late payments reported by your creditors. Although it may seem a little tedious, it’s essential that you read through this section very thoroughly. If you find any information that is incorrect or accounts that don’t belong to you, you’ll need to submit a dispute letter to the credit-reporting agency.

The basic format for the credit history section is as follows:

Company Name – identifies the company that is reporting the information.

Account Number – lists your account number with the company.

Whose Account- Indicates who is responsible for the account and the type of participation you have with the account. Abbreviations may vary depending on the reporting agency but here are some of the most common:

I – Individual

U – Undesignated

J – Joint

A – Authorized User

M – Maker

T – Terminated

C – Co-maker/Co-signer

S – Shared

Date Opened – This is the month and year you opened the account with the credit grantor.

Months Reviewed – Lists the number of months the account history has been reported.

Last Activity – Indicates the date of the last activity on the account. This may be the date of your last payment or last charge.

High Credit – Represents the highest amount charged or the credit limit. If the account is an installment loan, the original loan amount will be listed.

Terms – For installment loans, the number of installments may be listed or the amount of the monthly payments. For revolving accounts, this column is often left blank.

Balance – Indicates the amount owed on the account at the time it was reported.

Past Due – This column lists any amount past due at the time the information was reported.

Status- A combination of letters and numbers are used to indicate the type of account of the timeliness of payment.Abbreviations for the type of account are as follows:

O – Open

R – Revolving

I – Installment

Abbreviations for Timeliness of Payment varies among agencies. Numbers are used to represent how current you are in your payments. Current or paid as agreed is usually represented by 0 or 1. Larger numbers (up to 9) indicate that an account is past due.

Date Reported – Indicates the last time information on this account was updated by your creditor.

Collection Accounts Section

If you’ve had any accounts referred to collection agencies in the last seven years, this is where they will be reported. The name of the collection agency will be listed along with the amount you owe and, in some cases, their contact information. If a collection is listed on your report that doesn’t look familiar to you, contact the credit bureau and submit a dispute letter.

For your own piece of mind, you may also want to contact the collection agency (Or have Elite do it for you) to determine the nature of the account. Here’s why.

You may find out that the collection account is NOT yours. Perhaps it belongs to someone whose name or social security number is very similar to yours. If this is the case, ask the collection agency to acknowledge this fact in writing. They should send a copy of the letter to you AND the credit reporting agency so that the mistaken information can be cleared from your report.

You may find out that the collection account IS yours. If so, it is in your best interest to determine the accuracy of the amount of the collection account and make arrangements to satisfy your obligation as quickly as possible. Once the collection account has been paid, you should request a letter from the collection agency to this effect. Again, make sure the credit reporting agency gets a copy of the letter so that they can list the account as paid.

Courthouse Records Section

This section may also be referred to as Public Records. Here you’ll find a listing of public record items (obtained from local, state and federal courts) that reflect your history of meeting financial obligations. These include:

Bankruptcy records

Tax liens

Judgments

Collection accounts

Overdue child support (in some states)

Look closely at all the information listed here. If anything is mistaken, contact the credit bureau and submit a dispute letter.

Additional Information

This section consists primarily of former addresses and past employers as reported by your creditors.

Inquiry Section

Contains a list of the businesses that have received your credit report in the last 24 months. If you find the names of businesses that sound unfamiliar, you should find out who they are and why they’re looking at your credit! The credit-reporting agency may be able to help you with contact information. Remember, only companies that have received your written authorization should be able to check your credit history.

Time information is retained

The length of time that information remains in your file varies.

Credit and collection accounts will be reported for 7 years from the date of the last activity with the original creditor.

If you’ve filed a Chapter 7 or Chapter 11 bankruptcy, this information will be reported for 10 years from the date filed.

All other courthouse records will be reported for 7 years from date filed.

Section 604 of the Fair Credit Reporting Act says that the credit reporting agencies, Equifax (EFX), Experian (EXPN) and TransUnion, may furnish reports to any company that intends to use that information for the purpose of underwriting insurance. So, at the Federal level, the use of credit reports for underwriting insurance is perfectly legal and many of them do so. The real question is, why do they do it?

Insurance companies have the same issues lenders have: understanding the risk of doing business with certain consumers. It’s not necessarily the risk of being paid or not being paid for their services (premiums). It’s more so the risk of providing a policy for someone who is more likely to file claims and thus be a less profitable customer. It’s all about the money.

The primary difference between banking and insurance is that insurance policies are all secured, essentially. If you don’t pay your premiums they’ll cut you off, which could lead to you losing your home (it’s called a non-monetary default) or you getting arrested for driving without insurance. Determining whether or not you’ll pay your premiums is not the primary reason some of them pull your credit reports and credit scores.

The primary reason is to determine if they even want to do business with you and/or under what terms. Despite what many believe, how you manage your credit is very predictive of what kind of insurance customer you’ll be. It’s predictive not only of your likelihood of filing claims but also predictive of how profitable you’ll be. If it weren’t, insurance companies wouldn’t spend the money buying millions of credit reports and scores each year.

They’re Not The Same Credit Scores

Much like the financial services environment, the insurance environment relies heavily on credit scores. This isn’t anything new. However, the type of score they’re using is not the same type of score banks and other financial services companies use. In fact, they’re very different.

The scores used by insurance companies are called Insurance Credit Bureau Scores or Insurance Risk Credit Scores. They are developed by a variety of companies, including FICO and LexisNexis. LexisNexis develops the LexisNexis Attract Score, which is very commonly used by insurance companies.

Insurance scores consider credit information and/or previous insurance claim information. So, if you filed an auto claim or a homeowner’s claim it can be considered in your insurance score and it can result in a lower score. And if you’re assuming the presence of claims means that you’re a less profitable insurance customer, well, you’d be right. Yes, it’s all about the money.

But They’re The Same Credit Reports

While the scores used by insurance companies are different, the reports they use are the same as the reports used by financial services companies. The reason: all credit reports originate from the same three places; Equifax, Experian and TransUnion. Point being, there are no secret credit reports that insurance companies use to set your premiums.

Insurance Inquiries Don’t Hurt Your Credit Scores

Enough bad news. When you apply for insurance, the insurance company may or may not access your credit reports and scores. There is no guarantee that they will, in fact, pull your credit reports. But, it’s a safe bet.

If the insurance company does choose to access your credit report and score, there will an inquiry posted to the credit file. It will clearly be identified as being from your insurance company. And, more importantly, it will systemically be coded as coming from an insurance company. This is good news because insurance related inquiries are not counted in your credit scores.

You will be able to see them, but no other entity will be able to see them. And, credit-scoring systems don’t not consider insurance-related inquiries so they’ll never lower your credit scores.

Wonder how your credit report is created? Sometimes it’s best not to know how the sausage is made, but in this case some extra knowledge may be enlightening.

John Ulzheimer, a credit expert, worked with the Web site Credit Sesame to create a graphic map showing how various types of information make their way — or not — into your credit report.

In most cases, Mr. Ulzheimer said, the credit bureaus — like Equifax, Experian and Transunion — receive information from institutions where you have accounts, like credit card issuers or home loans or student loan lenders. In industry lingo, these are known as “trade” or “tradeline” accounts, he said.

Those accounts make up the bulk of the information in your credit report. Institutions provide the data under agreement with the bureaus, in exchange for access to credit files so they can evaluate the creditworthiness of applicants. Institutions aren’t legally required to report credit information — but if they don’t, they lose the benefit of having access to credit reports.

When credit bureaus get customer data, he said, they generally audit it before posting it to your credit file, to help avoid errors and disputes. A batch of data with an unusually high proportion of delinquencies, for instance, might be sent back for double-checking.

When lenders seek your credit report in response to an application for a credit card or a loan, it shows up as a “hard” inquiry. Too many such inquiries may cause your credit score, which is based on information in your credit report, to dip.

Some inquiries don’t affect your score, however. They include requests made as a result of applying for insurance or for service from a utility company, Mr. Ulzheimer said, and requests you make yourself for a copy of your credit report.

Some public records, like bankruptcy filings or federal tax liens, usually appear on your credit reports because the credit bureaus have electronic access to federal courts through the Pacer document system. But civil judgments filed with state and county courts may or may not show up on your report, since not all of those courts make such information available electronically. Credit bureaus may be able to find the information through database services, but its appearance in credit files is generally less consistent than legal information generated by federal courts. (In other words, you may get lucky.)

Have you ever had a legal judgment appear on your credit report? What impact did it have?

Ask the Expert: Does Opting Out of Credit Card Offers Improve Credit Scores?

September 16, 2013 by John Ulzheimer

The world of consumer credit is loaded with myths, some more stubborn to debunk than others. Credit scores are used by employers, you build credit faster by carrying credit card balances, credit scores reward you for being in debt, opting out will improve your credit scores. None of these things are actually true and it’s the last myth that I’ll address today.

What is opting out?

Today when you get home from work or school and check your mail you’ll likely find one or more credit card offers from credit card issuers. Those offers are likely of the “preapproved” variety, which means the credit card issuer has actually determined that they are willing to offer you a credit card even though you never asked for one.

The credit card issuer purchased your name, along with many others, from one of the credit reporting agencies through a process called “prescreening.” Prescreening is the process whereby the card issuer gives the credit bureau a list of criteria and wants a list of consumer names and addresses that meet that criteria.

So, for example, I might ask one of the credit bureaus to provide me with list of 1,000,000 names and addresses belonging to consumers who live in the metro Atlanta area who have VantageScore credit scores above 725, don’t have any late payments in the past 24 months, and don’t have more than $10,000 of credit card debt. This is called “selection criteria.” Of course, the credit bureaus have to tap into their credit file database in order determine who meets this criteria.

If the credit card issuer acquires your name and address using this method then they have to make you what’s referred to as a “firm offer of credit or insurance.” This is normally done by sending you a credit card offer in the mail saying that you’ve been pre-approved for some amount of credit. All of this will result in a “promotional” inquiry being posted on your credit report.

The Fair Credit Reporting Act gives consumers the ability to prevent the credit bureaus from selling their names to lenders through a process called “Opting Out.” You can do this for free at www.optoutprescreen.com. You can opt out forever or for a shorter amount of time. After a few months you’ll stop getting preapproved credit card offers in the mail.

The opting out myth

Some people suggest that you will improve your credit scores by opting out. The problem is that it’s not true. Opting out has no impact, at all, on your credit scores.

The only direct influence opting out has on your credit reports is to prevent new promotional inquiries from being added. But, promotional inquiries are of the “soft” variety and they have no impact on your credit scores anyway so preventing them doesn’t do anything for your scores.

Advantages to opting out

That certainly doesn’t mean there’s no value to opting out. You’ll certainly reduce or fully eliminate credit card offers, which means less mail to throw away or shred. And, because those credit card offers can be used by credit card fraudsters to open new cards in your name opting out can help to minimize your risk of credit card identity theft. But, that’s where the value ends.

Trying to fix a mistake in your credit report by providing a detailed set of documents to credit bureaus could be a waste of time.

The Consumer Financial Protection Bureau, in a report released (in 2013), suggested that the three major credit-reporting firms–Equifax Inc. EFX -0.69% , TransUnion LLC UK:EXPN +1.60% and Experian PLC –may not be giving adequate consideration to information submitted by consumers disputing their credit reports.

Federal law requires credit-reporting firms to send suppliers of consumer data — including credit-card companies, banks and collection agencies — notice that includes “all relevant information” supplied by the consumer.

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But rather than pass along documents, the industry uses a computerized coding system to describe the complaint. The big three credit-reporting firms “generally do not forward documentation that consumers submit with mailed disputes or provide a mechanism for consumers to forward supporting documents when filing disputes online or via phone,” the report said. See the full report.

For example, if a consumer has evidence that a debt has been paid off, the credit bureau may not pass along that information to his or her credit-card company or a debt collector.

Norm Magnuson, a spokesman for the Consumer Data Industry Association, which represents credit-reporting firms, said the industry’s system is adequate and handles a huge volume of complaints quickly and efficiently.

“The lenders are getting all the information they need to resolve the dispute in a timely manner,” he said.

An industry-funded study from last year that found that 95% of consumers were satisfied with the dispute-resolution process, Magnuson said. Representatives of Equifax, TransUnion and Experian either declined to comment or couldn’t be reached for comment.

The report didn’t come to any conclusions about whether the credit bureaus are out of compliance with this piece of the law.

The consumer bureau found that credit-reporting firms resolve 15% of complains on their own, passing along 85% to the financial institutions that provide reports on consumer activities, known in the industry as “data furnishers.”

Credit reports are used by lenders to evaluate potential borrowers for home loans, auto loans and credit cards. Earlier this year, the consumer bureau began overseeing the industry, and plans to evaluate whether the firms are providing accurate consumer information, handling consumer disputes appropriately and preventing fraud.

The consumer bureau’s report “sheds light on a process that’s tilted against the consumer,” said John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site.

The CFPB report also found that fewer than one in five consumers get copies of their credit report every year.

I know what you’re thinking, didn’t you already send out an article like this? Yes, I did. But this list is different. Here are 6 new Myths that are uncovered for you:

Myth #1: FICO, the company, calculates your FICO scores
In order for your FICO score, or any of your credit scores, to be calculated two things have to be married; your credit report and a scoring model. FICO, the company, does not maintain your credit reports. As such, FICO cannot calculate your FICO scores. The FICO scoring software is installed at Equifax, Experian and TransUnion. This gives the credit reporting agencies the two things needed to calculate a FICO score. That means your FICO scores are calculated and delivered to lenders by the credit bureaus.

Myth #2: The credit bureaus grant or deny credit applications
Believe it or not, this is a pretty common myth. It’s so common that Federal law requires lenders who have denied your credit application to communicate with you that the credit bureaus had nothing to do with their decision. The credit bureaus simply provide lenders with your credit reports and credit scores. That’s where their involvement with the loan approval (or denial) process ends. If you’ve been denied, it was the lender that denied you. You can plug FICO into this myth as well, as they also have nothing to do with the approval or denial process.

Myth #3: Equifax, Experian and TransUnion are credit rating agencies
These companies are legally defined as “Consumer Reporting Agencies” and more commonly referred to as credit bureaus or credit reporting agencies. Credit rating agencies are companies like Moody’s, Standard and Poor’s or Fitch Ratings. They’re the guys who assign letter grades to certain types of debt obligations. Sometimes, FICO gets lumped in with the credit bureaus and the incorrect designation of a credit rating agency.

Myth #4: Credit reports and credit scores are the same thing
This myth is so prevalent that it has lead to the most common misunderstanding relative to credit scores, which is that they’re used for employment screening. Think of credit reports as a car and credit scores as the stereo upgrade that doesn’t come standard with the car. A credit score is a product sold along with credit reports, just not to employers. The interchangeable use of the terms is improper.

Myth #5: FICO is a credit reporting agency
FICO is a lot of things, but none of those things is a credit reporting agency. The credit reporting agencies gather, maintain, and sell credit-related information to lenders, insurance companies, consumers and other parties. FICO does not have a credit file database. They’re an analytics company.

Myth #6: A charge card and a credit card are the same thing
The only thing similar between charge cards and credit cards is that they’re both made of plastic and you can buy stuff with them. A credit card allows you to roll or “revolve” a portion of your existing balance to the next month, a process that will result in the assessment of interest. A charge card is a “pay in full” product, in that you have to pay off the balance, in full, every month.
Charge cards almost always have annual fees, which help the issuer to make money in the absence of interest. Credit cards generally rely on interest and fees for their financial contribution to the issuer’s bottom line. Charge cards are not nearly as common as credit cards but they’re a pretty decent option if you want the convenience of plastic without the possibility of getting deep into debt.

By; John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.

Credit repair, done right, can do wonders for your credit report and your scores too! Here are a few tricks of the credit repair trade that will really make your scores move fast. Put them to work individually, or all at once, depending on your own needs, and watch the magic happen.

1) Open Accounts Right Now!!!
The FICO scoring model will give you bonus points for opening new accounts after a period of bad credit. It is all in the timing. Those old cards that survived the tough times are still worth something, but when it comes to credit repair FICO wants you to prove that you still have what it takes to get back in the swing of borrowing money. If your credit is crummy, secured credit cards are ideal. Small is good! Open now, pay on time, keep your balances low, and your scores may rise over 100 points in the next six months.

2) The Balance-Limit Connection
This credit repair tip is just as urgent for those opening new accounts today as it is for those managing already well seasoned revolving accounts. A little change in your balances can send your credit scores flying or diving. Have you maxed out a card lately and then checked out your scores? This is a fairly recent FICO tweak which can work for or against you. Try to use less than 30 percent of your limit for the best result.

3) Take a Look!
Have you seen you credit report lately? If not, why not??? There may be errors lurking and a simple dispute or challenge to the credit bureaus may be all it will take to get your scores back on track. Not sure how to check your report or how to dispute? Contact a professional right away. Good luck!